It’s clear there is a credit crunch looming in the wake of the global pandemic. Some research suggests that governments across the world have spent $11 trillion dollars helping their economies and citizens through the lockdown periods.

I don’t want to dwell on the bad news, but the pandemic has increased unemployment significantly. And even people who have full-time jobs are seeing their hours being cut or their salaries reduced to prevent layoffs.

Nearly nine out of 10 people (88%) are worried about the economy and two thirds are concerned about their personal job security.

Governments will eventually stop their stimulus packages, and banks may start focusing on asset recovery and collections. We saw early signs of this back in April when some lenders simply canceled the credit cards of many consumers.

Many of those customers probably didn’t deserve this “one-size-fits-all” treatment.

As I’ve pointed out before, having learnt the lessons of the 2008 banking crisis, the banking sector today is in good shape. Capital levels across the industry can absorb roughly three times the credit losses they could in the recession that followed the 2008 crisis.

The first thing banks can do is look carefully at their credit policies.

Do you have a central ability to manage your credit portfolio holistically? Public health and macroeconomic factors will change almost monthly, so your strategy needs to be able to adapt to the changing circumstances.

The idea is to tailor credit management strategies by geography and industry.

To do this, banks will need a lot of information about their customers. Fortunately, they have that information already. It is mostly being used to market and cross-sell existing products, but with the right analytics and strategy that data can be valuable in managing credit and collections.

The key to differentiation is not rapid collection. It’s quickly understanding where the customers find themselves, and then adopting the right recovery approach per customer. The goal is to get the customer to share more information with the bank. If banks have more information and more accurate information about their customers’ businesses, they will be able to see opportunities and risks that might have eluded them before.

Banks have also started to look at their customers’ collateral. Aircraft and commercial property may once have been safe asset classes, but that has changed. Do you have the analytics to find your exposure to different asset classes and create a new strategy that matches the rapidly changing market?

Different asset classes have different recovery times. Some commercial properties will be redeveloped into residential. Hotels may recover more quickly than, say, aircraft.

There’s an opportunity for banks to look ahead at macroeconomic and social trends three to five years out. What will the move to electric vehicles and sustainable energy mean for specific assets, like those that oil and gas companies own?

Part of a good portfolio is a good exit strategy. Italy and Spain have already transferred bank assets into specialised vehicles for securitization and whole loan sales.

The danger is that banks exit their portfolios too soon. This will make the crunch even worse. As banks decide they are no longer interested in whole asset classes, the prices of those assets could plummet. Banks holding that class of assets will suddenly be left with under-valued assets. This could cause a negative feedback loop which would be bad for banks, bad for business and bad for society.

Managing credit portfolios well has always been tricky. There are a lot of moving parts. As always, there will be a demand for skilled bankers with a clear vision and a steady hand — bankers who have access to, and the ability to interpret and understand, all the customer and credit data they already own.

You can read the full report of how banks can adapt their approach by clicking this link. I’m always interested in how you think this will play out. You can leave comments here, or mail me directly at Jigyasa.a.singh@accenture.com.

Jigyasa Singh

Jigyasa Singh

Managing Director – Financial Services, Africa

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